Investing Advice

Investing Strategy

The Buffett Approach.

It’s hard to argue with the investing strategy of a man who has accumulated a net worth of over $42 billion.  He obviously is doing something well and it’s paid off big time.  Looking at his strategy in greater detail can provide us with some valuable insights into structuring our own investing approach.   

First and foremost, Buffett doesn’t view the process as purchasing a stock, but as investing in a company.  A company which he is going to have a vested interest in as a long-term owner. 

He isn’t seeking capital gains, but ownership in strong companies that are capable of generating earnings.  He isn’t concerned with whether or not the market will come to realize what that company is worth.  He is focused on how well that company can make money.

Buffett also looks at several other factors, including but not limited to:

1. Consistent performance over time.  This isn’t just for the last year, but for the past 5 to 10 years.

2. Small debt levels.  Buffett likes to see a small amount of debt so that earnings growth is being generated from shareholders' equity instead of from borrowed   money.

3. High and increasing profit margins.  High profit margins indicate that a company is doing its business well while increasing margins mean that they are being extremely efficient and successful in controlling expenses. Again, review financial statements for at least the past five years to get an accurate picture of profitability.

4. Longevity. Buffet only considers companies that have been publicly traded for at least 10 years.

5. Unique product offering. Buffett tends to favor companies that provide a unique service or product.  He considers this to be a competitive advantage.

6. Stock selling at 25% discount of its real value. This is probably the hardest factor to calculate but the one that Buffett does the best.  The one that’s put him on top.
 

The results of his strategy can not be disputed.  He has seen an average return rate of around 30% per year for over 40 years and wealth of about $42 billion.  Not bad for a stockbroker’s son from Nebraska. It certainly looks as though he's sorted his retirement investing as well!

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